Apple app advantage eroded as Google narrows iPhone lead

SAN FRANCISCO - Five years after popularizing the term "app" and sparking a mobile-software boom, Apple is losing its advantage in smartphone applications to Google, diminishing one of the iPhone's selling points.

Sales of applications from Google's online store doubled in the fourth quarter from the prior three months while Apple's revenue climbed 20 percent, according to market researcher App Annie. And some software firms such as Ngmoco, which historically wrote programs for Apple before Google, have put the two operating systems on equal footing - in some cases developing for Google first.

The new connectors for the iPhone 5 is displayed during Apple Inc.'s iPhone media event in San Francisco, California September 12, 2012. REUTERS/Beck Diefenbach (BECK DIEFENBACH)

Apple was for a time the biggest smartphone maker and its mobile operating system was the most widely used, in part because of the company's leadership in downloadable games, magazines and productivity tools. It fell behind in software to Google's Android in 2010 and ceded the top hardware spot to Samsung Electronics last year. After trailing Apple for years by number of apps available, Google caught up last year, saying in October that its Google Play featured 700,000 applications, the same number Apple boasted that month.

"It's growing exponentially - we've seen an inflection point the past six months," said Clive Downie, chief executive officer of the Ngmoco unit at DeNA, which bought the apps maker in 2010. "We treat Android and Apple the same. They are equal partners to us and we put equal amounts of resources toward both platforms."

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Google's gains are mirrored by the companies' share prices. Google closed at a record high on Feb. 1, while Apple's stock has tumbled 37 percent from its peak in September. Apple is trading at a 55 percent discount to Google on a price-to- earnings basis. That's the widest spread since July 2006, about a year before the iPhone was introduced.

Three of four handsets sold in the $260 billion global smartphone market are powered by Google's Android operating system. To press the advantage, Google has been making it easier for programmers to build apps and simpler for users to find and purchase them.

As consumers increasingly turn to mobile devices to complete computing tasks once done on desktop machines, Google's push into apps is helping sell phones that run Android software from companies such as Samsung and HTC Corp. Google's app advance has been accelerated by Samsung's Galaxy S III, the No. 2 handset behind the iPhone 5 in the fourth quarter, according to Strategy Analytics.

Apple has had measurable advantages since co-founder Steve Jobs introduced the App Store in 2008 along with the "there's an app for that" marketing campaign. The company limits iOS mobile-software updates to once a year, making it easier for developers to create new titles. It simplifies purchases by using the millions of credit cards stored in users' iTunes accounts.

Apple has more than 800,000 apps in its online store, the company said last month. More than 40 billion apps have been downloaded from the App Store, generating more than $7 billion for developers, Apple said in January. That's up from $5 billion in June.

"Google is definitely starting to catch up," said Chris Carvalho, chief operating officer of video-game maker Kabam, whose "Hobbit" game is among the top sellers for Android. "The gap is still there a little bit, but it's closing."

BlackBerry, which ranks a distant third behind Apple and Google with less than 5 percent of the smartphone market, said last month that it has more than 70,000 apps for its new Z10 touch-screen handset. BlackBerry's lack of apps helped devices from Apple and Google usurp market share.

While Google doesn't disclose comparable sales figures, the company said in September that at least 25 billion apps had been downloaded since the Android app store started in 2008, with a growth rate of about 1.5 billion a month. Google Play posted a fourfold increase in payouts to developers last year.

Apple's app sales generate 3.5 times the revenue of Google's, according to App Annie.

"It's great to be the standard bearer, but it puts a lot of targets on your back," said Bob Bowman, head of Major League Baseball's interactive media group, which has a tool for monitoring games that is one of the highest-grossing programs in the App Store.

In its drive to chip away at Apple's advantages, Google hired Purnima Kochikar from Nokia Oyj in October to run business development for Google Play. She's working to make it easier for developers to create and maintain apps for Android and streamline payments.

Because Google provides Android free to an array of handset makers, developers have been frustrated by the need to customize apps for different devices. Lower payouts have also been an impediment for Android.

"Apps on Android can't push the envelope as much," said Jeff Daniel, chief executive officer of StarMaker Interactive, maker of a karaoke app for the iPhone. Still, he said the tide is turning as Android grows, and that his company is working on an app for Android, too.

Google has started design workshops and video chats to show developers simpler ways to manage apps and win more users, Kochikar said. Android updates are also coming out less frequently.

For more seamless payments, Google debuted in-app billing in 2011 and then expanded that option to include subscriptions last year. In some markets, Google has teamed up with wireless carriers, such as SK Telecom in South Korea and Verizon Wireless in the U.S., to include app purchases on phone bills, Kochikar said.

In Japan and South Korea, two countries with direct carrier billing, Google developers have seen revenue jump almost 14- fold, the company said. Almost half of Android users have access to direct-carrier billing.

"We really took the time to understand how people buy," Kochikar said in an interview. "We took a very comprehensive, complete life-cycle approach to really understand what it takes to build a great app."

Developers are noticing. Ngmoco was one of the first makers of iPhone games, building up enough customers to eventually sell for $400 million to DeNA, a Japanese games publisher. In 2011, Ngmoco viewed Android as an untapped market and began making games for Google's platform.

Kabam's Carvalho credits Samsung's Galaxy S III, with features matching the iPhone, for much of the surge in apps for Android. Developers can also release Android software more quickly because, unlike Apple, Google doesn't review apps before including them in its store.

"The momentum is unbelievable," said Google's Kochikar. "My job is getting easier every day."

App developers are making as much as 40 percent of their revenue from Google, compared with about 15 percent a year ago, according to Jim Goetz, a partner at venture capital firm Sequoia Capital.

"You have both the rate of growth and the overall economy starting to have real merit," said Goetz. "There are a number of entrepreneurs who are looking to take advantage of that."

Android still has room for improvement, particularly to address the programming challenge posed by varied screen sizes and graphics power among a panoply of handsets. Major League Baseball, for example, has 2,400 versions of its app for Android, while it needs just 40 for Apple. Google's payment system is also more complicated than Apple's, according to Bowman, the baseball executive.

"It's getting better, but by inches and centimeters, not leaps and bounds," Bowman said.

Even so, any eroding of Apple's leadership adds to the pressure facing the iPhone maker, which last month reported the slowest revenue growth in 14 quarters as the smartphone and tablet markets become increasingly crowded.

"Competition is good," said Ngmoco's Downie. "Competition makes the people involved deliver better services to their customers. It's as simple as that."